Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Accounting Standards: International Financial Reporting Standards (IFRS)
Functional Currency: U.S. Dollar (USD)
Embraer is a leading manufacturer of commercial, executive, and defense aircraft. The company operates three primary segments: Commercial Aviation (56.7% of revenue), Executive Jets (27.8% of revenue), and Defense & Security (15.0% of revenue). The Brazilian federal government holds a "golden share" granting veto rights over specific corporate actions and defense programs.
Key Financial Metrics
| Metric (USD Millions) | 2016 | 2015 |
|---|---|---|
| Revenue | 6,217.5 | 5,928.1 |
| Gross Profit | 1,236.8 | 1,111.3 |
| Gross Margin | 19.9% | 18.7% |
| Operating Profit | 206.0 | 331.5 |
| Net Income (Attributable to Owners) | 166.1 | 69.2 |
| Diluted EPS (USD) | 0.2253 | 0.0943 |
| Cash & Equivalents | 1,241.5 | 2,165.5 |
| Total Debt | 3,759.9 | 3,530.5 |
| Operating Cash Flow | (20.5) | 862.5 |
| Backlog (Aircraft) | 636 | 750 |
| Backlog (Value USD Millions) | 19,622.8 | 22,460.7 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 4.9% to $6.22 billion, driven by a 5.3% increase in Commercial Aviation deliveries (108 units vs. 101 in 2015) and a 15.0% increase in Defense & Security revenue.
- Profitability Surge: Net income attributable to owners more than doubled to $166.1 million (from $69.2 million). This was primarily due to a significant income tax benefit of $8.7 million in 2016 compared to an expense of $255.4 million in 2015, driven by exchange rate impacts on deferred taxes.
- Operating Expenses: Reported operating expenses increased 32.2% to $1.03 billion. This increase was largely due to non-recurring items totaling $293.1 million, including $228.0 million related to the settlement of FCPA investigations and $117.3 million for a voluntary employee dismissal program.
- Cash Flow: Operating cash flow swung from a positive $862.5 million in 2015 to a negative $20.5 million in 2016, attributed to increased inventories and declines in customer advances.
- Backlog: Total firm order backlog decreased to 636 aircraft ($19.6 billion) from 750 aircraft ($22.5 billion) in 2015.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2017 Delivery Guidance: Embraer expects to deliver 97 to 102 commercial jets, 70 to 80 light executive jets, and 35 to 45 large executive jets in 2017.
- Capital Expenditures: The company expects to invest approximately $600 million in 2017 for product development and property, plant, and equipment.
- E-Jets E2 Program: The E190-E2 is expected to enter service in the first half of 2018, the E195-E2 in 2019, and the E175-E2 in 2021. Total investment is estimated at $1.7 billion through 2021.
Risks and Contingencies
- FCPA Settlement: In October 2016, Embraer finalized agreements with the U.S. DOJ, SEC, and Brazilian authorities regarding FCPA violations. The company agreed to pay approximately $205.5 million in total penalties and disgorgement and is subject to a three-year independent monitorship.
- Republic Airways Bankruptcy: Following Republic Airways' Chapter 11 filing in February 2016, Embraer provisioned $100.9 million for financial guarantee obligations. The company later assumed responsibility for repurchasing ERJ 140/145 aircraft from Republic.
- Off-Balance Sheet Exposure: As of December 31, 2016, the maximum unrecorded exposure under financial and residual value guarantees was $300.3 million.
- Brazilian Economic Conditions: The company faces risks related to Brazil's recession (GDP contraction of 3.6% in 2016), political instability, and currency volatility. Approximately 15% of costs are incurred in Brazilian Reais.
Key Facts for Investor Verification
- Non-Recurring Charges: Verify the impact of the $293.1 million in non-recurring expenses (FCPA settlement and dismissal program) on the true operating performance, as adjusted operating income increased 15.4% to $499.1 million.
- Tax Volatility: Confirm the sustainability of the net income increase, which was heavily influenced by a $146.5 million deferred tax benefit driven by the appreciation of the Brazilian Real against the U.S. Dollar.
- FCPA Monitorship Costs: Monitor future financial statements for costs associated with the three-year independent monitorship and compliance program enhancements.
- Republic Airways Resolution: Track the final financial impact of the Republic Airways bankruptcy resolution and the repurchase of aircraft.
- Backlog Conversion: Assess the conversion rate of the $19.6 billion backlog into revenue, noting the decrease in total backlog units year-over-year.